Concept of Demand & Supply

Subject: Economics

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Overview

Demand
i. Types of Demand
ii. Determinnts of Demand
iii. Law of Demand
iv. Demand Function
v. Linear and Non-Linear Demand Function
vi. Demand Curve
vii. Individual and Market Demand Curve
viii. Movement Along The Demand Curve & Shift In Demand Curve

Supply
i. Determinnts of Supply
ii. Law of Supply
iii. Supply Function
iv. Linear and Non-Linear Supply Function
v. Supply Curve
vi. Individual and Market Supply Curve
vii. Movement Along The Supply Curve & Shift In Supply Curve

Market Equilibrium

Concept of Demand & Supply

Introduction:

Demand and supply are the basic tools for microeconomics analysis of the market economy. The demand theory reflects the consumers' behavior to make decisions for the consumption of goods services within their limited income. The supply theory reflects producers' behavior to make decisions for the production of goods and services at a given cost within their limited resources. The interaction of market demand and market supply determines the equilibrium price of goods and services and that price clears the market.

             This is known as price mechanism or market mechanism which decides the basic economics issues what to produce, hot to produce & for whom to produce in the economy.

Demand

In general sense, the desire for getting anything is defined as a demand but in economics, the effective desire of a consumer backed by the willingness to pay & ability to pay at a particular time & price is called demand.

Types of Demand:

i. Price Demand:
Other things remaining the same, price demand is the quantity demanded at various level of price. It shows the inverse relationship between price and quantity demanded.

ii. Income Demand:
Other things remaining the same, income demand is the quantity demanded at various level of income for a consumer.

iii. Cross Demand:        
Other things remaining the same, price demand is the quantity demanded of goods 'X' at various level of prices of goods 'Y'.

Law of Demand:
Law of demand shows that there is inverse or negative relationship between price and quantity demanded for goods at a particular time, other things remaining the same i.e. people buy more goods at the low price & less goods at a high price.
           In other words, other thing remaining the same, quantity demanded for a goods increases with a fall in price and diminishes with a rise in price.

Determinants of Demand:

Those factors which change the quantity demanded of a commodity are known as determinants of demand. There are various price & non-price factor that brings change in the quantity demand of a commodity. Some important factors that determine quantity demand are as follows:

i. Price of Commodity:

Quantity demanded for a commodity depends upon its price. Generally,  the price and quantity demanded of a commodity are inversely related. When the price of a commodity falls, its quantity demanded increases and vice versa.     

ii. Consumer's Income:

Income of the consumer also affects the demand for a commodity. Normally, an income of the consumer & demand for a commodity is positively related. When income increases, demand for commodity also increases and vice versa.

iii. Price of the related goods:

There are two type of related goods i.e. Substitute goods & Complement goods. Quantity demanded for a commodity is also affected by the change in the price of related goods.

iv. Taste & Preference:

Taste & Preference also brings substantial change in quantity demanded of a commodity.

v. Season:

Demand for goods & services also depends upon seasons. For example, during the winter demand for woolen clothes increases. Similarly, during the summer, the demand for cotton clothes is very high & woolen clothes are very low.

Demand Function:

Demand function shows the functional relationship between quantity demanded and its determinants.

Linear and Non-Linear Demand Function:

In linear demand function, the rate of change in quantity demanded is constant & expressed as Qd = a-bP.

In non-linear demand function the rate of change in variable and expressed as Qd=\(\frac{a}{P^{b}}\).

Demand Curve:

Demand curve is the graphical representation of a negative relationship between price and quantity demanded.

Individual and Market Demand Curve:

Individual demand curve is the graphical representation of quantity demanded of an individual consumer at various level of the price of goods.

Market demand curve is the horizontal summation of all individual demand curves.

Movement Along The Demand Curve & Shift In Demand Curve:

Movement along the demand curve is the change in quantity demanded due to change in price. 

If the demand curve shifts from the initial demand curve to the new demand curve due to the change in non-price factors is known as a shift in demand curve.

 

Supply 

In general sense, supply refers to the quantity of produced goods but in economics the quantity of produced goods that a producer or seller is willing to sell at a particular price and time.

Law of Supply:

Law of supply shows that there is positive relationship between price and quantity supplied for goods at a particular time, other things remaining the same. It means when the price of goods increases, quantity supplied for the goods also increases & vice versa.

Supply Function:

Supply Function shows the functional relationship between determinants of supply and quantity supplied.

Linear and Non-Linear Supply Function:

In linear supply function, the rate of change in quantity demanded is constant & expressed as Qs=a+ bP.

In non-linear supply function, the rate of change is variable & expressed as Qs=aPb.

Supply Curve:

Supply curve is the graphical representation of positive relationship between price and quantity supplied.

 

Individual and Market Supply Curve:

Individual supply curve is the graphical representation of quantity supplied of an individual producer at various level of price of a goods.

            Market supply curve is the horizontal summation of all individual supply curves.

Movement Along The Supply Curve & Shift In Supply Curve:

Movement along supply curve is tha change in quantity supplied due to change in price.

        If the supply curve shift from initial supply curve to new supply curve due to the change in non-price factors is known as shift in supply curve. Demand links has inverse or negative realtion with price & supply link has positive relation with price. Therefore the intersect point between demand & supply is known as equilibrium.

 

Market Equilibrium

Market Equilibrium is the situation of equality between two opponents forces market demand & market supply of a commodity that determines equilibrium price & quantity.

       The equilibrium refers to a situation in which there is no tendency to change. A position at which two opponent forces are intersect at apoint is called equilibrium. Here, the meaning of two opponent forces are demand & supply. Demand links has inverse or negative relation with price & supply link has positive relation with price. Therefore the interest point between demand & supply is known as equilibrium.

 

 

 

 

 

 

 

 

 

 

 

 

Things to remember

Demand
i. Types of Demand
ii. Law of Demand
iii. Determinnts of Demand
iv. Demand Function
v. Linear and Non-Linear Demand Function
vi. Demand Curve
vii. Individual and Market Demand Curve
viii. Movement Along The Demand Curve & Shift In Demand Curve

Supply
i. Law of Supply
ii. Determinnts of Supply
iii. Supply Function
iv. Linear and Non-Linear Supply Function
v. Supply Curve
vi. Individual and Market Supply Curve
vii. Movement Along The Supply Curve & Shift In Supply Curve

Market Equilibrium

  • It includes every relationship which established among the people.
  • There can be more than one community in a society. Community smaller than society.
  • It is a network of social relationships which cannot see or touched.
  • common interests and common objectives are not necessary for society.

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